Straw #1 (of 2) 26-Apr-2020:
What's going to happen to VAH?
What are the implications for existing shareholders?
The short answer is "we don't know". However, keep in mind that they might NOT trade again.
I have held shares in companies that called in the administrators and most of them never trade again, even the ones that are successfully recapitalised. One of my recent experiences was a small holding in TFS, which turned into QIN (Quintis). They grew Sandalwood trees. They still do. However, at the time, they were the subject of a high-profile short seller attack, and they subsequently called in administrators, were successfully recapitalised, but shareholders were at the bottom of the pecking order, so they got nothing. QIN are now a private company, so are no longer ASX-listed. The whole thing dragged on for about 3 or 4 years, and they were only removed from my super fund holdings about 2 months ago. See: https://quintis.com.au/ and: https://thewest.com.au/business/from-glitz-to-pits-how-quintis-went-wrong-ng-b88722895z
Most Receivers and Administrators will allow companies to continue to operate while they work through the accounts and the various options that might be available to recapitalise the company and return it to commercially successful operation (i.e. a company that can pay its bills as they fall due). That doesn't mean that they will necessarily recommence trading at some point. In the case of VAH, I think they have called in the Administrators nice and early, possibly in an attempt to try to encourage/force a government bailout.
A government bailout will NOT be forthcoming, because VAH is currently over 90% foreign owned - despite being listed on the ASX - with their major shareholders being Etihad Airways (20.94%), Singapore Airlines (20.09%), the China-based Nanshan Group (19.98%), the China-based HNA Group (19.82%), and Richard Branson's Corvina Holdings (10.42%). Corvina is ultimately owned and/or controlled by Branson's VGHL - Virgin Group Holdings Limited - as well as by other companies (Grenache, Gamay, Cougar, Plough, etc.) all controlled by Branson and his fellow VGHL executives and are all registered in the tax haven of the British Virgin Islands.
That lot account for 91.25% of the VAH shares on issue, and they're all 100% foreign-controlled companies. That just leaves a free float of 8.75% of TAH's shares - which is nowhere near enough to justify an Australian government bailout, or even a loan. Our government would effectively be loaning money to 2 large Chinese corporations (Nanshan and HNA) as well as to Singapore Airlines, Etihad Airlines and to Richard Branson's Corvina Holdings, a holding company registered in the British Virgin Islands (possibly the REAL reason for the "Virgin" name).
The reason that I think there's a better than even chance that VAH will likely trade again at some point is that those large major shareholders have too much to lose if they don't.
There are a number of both listed companies and unlisted groups (private equity firms) that would like to get hold of Virgin Australia's assets, at the right price. However, the big question is whether the big shareholders have got any rights beyond those that owning ordinary shares confers on them. If they haven't, it is entirely conceivable that Virgin Australia COULD be recapitalised via a private equity bailout that would leave shareholders with nothing. If that is indeed a possibility, then those shareholders who currently hold around 20% each of the company (Nanshan, HNA, Etihad and Singapore Airlines) - and 80% between the 4 of them - would look to find a viable alternative which would see them realise SOME value from their investment. That might mean that they have to tip in more money themselves - which might look a lot more appealing to them than the possibility of losing 100% of their investment in VAH.
Any way you look at it, if you already hold shares in VAH, it's bad; you are either going to get massively diluted by this recapitalisation, OR likely lose up to 100% if they don't recommence trading. If they get taken over by PE (private equity) they will likely never trade again, until such time as that PE mob want to put some lipstick on the pig and refloat the company (like they did with Dick Smith Holdings a couple of years after they bought it from WOW - Woolworths) to make some coin from their "investment". I see that PE scenario as less likely in this case because you've got 4 overseas companies that each hold around 20% of VAH, and together own 80% of VAH, and will want to salvage something from their collective investments, so would be unlikely to sit there passively and allow the PE scenario to play out without putting up a decent fight. This is what the Australian Government have been saying - you have some large overseas investors on the register - so get some money from them. I think that getting some more money from them is one of the more likely scenarios.
[continued in straw #2]
Deloitte is calling in back-up as it seeks to sell Virgin Australia.
It is understood Virgin's administrator is seeking to appoint Morgan Stanley to run the airline's sale in conjunction with existing adviser Houlihan Lokey.
Morgan Stanley knows Virgin well. Its bankers spent the past month working with the airline's board and management as it set about finding its own rescue package, before Virgin's board handed the baton to Deloitte.
Morgan Stanley was also the bank that stitched up Arrium's sale from administration in 2016.
It is understood Deloitte has spoken to a small handful of banks about the role since it was appointed last week. Morgan Stanley and UBS were the two banks that worked with Virgin Australia during the recent restructure deliberations.
It is said to be keen to finalise Morgan Stanley's appointment within the coming 24 hours.
Should Morgan Stanley sign the mandate, it would be expected to put a big team on the deal immediately.
Deloitte has already made a seven-point pitch to potential buyers and told them to expect a detailed information memorandum outlining Virgin and its financial position this week.
Deloitte said last week that about 10 suitors had already expressed interest in the business. The tyre-kickers are believed to include BGH Capital, Bain Capital, Brookfield, Indigo Partners and Oaktree Capital Management.
Straw #2 (of 2) 26-Apr-2020:
...continued from Straw #1...
How much longer this recapitalisation will keep Virgin Australia in the air for (after COVID-19), I have no idea. From all accounts, they have not been well run, they underestimated QAN as a competitor, and VAH management have made a lot of bad decisions over many years which has resulted in them making billions of dollars in losses. I don't see much evidence yet that they have a radically different business plan going forwards that's going to turn all of that around. Therefore, if I did own shares in VAH (and I don't), I would be selling them at my first opportunity, if I was to get that opportunity. That's not advice, that's just what I would do, and doesn't take into account anybody else's circumstances.
If VAH are taken over by PE or by a listed new owner, you know they are going to install new management and have a radically different business plan. They are likely to stick to the budget end and stop chasing business from businesses (no more business class). They will also likely stick to the high-traffic routes within Australia and New Zealand and reduce their services. That might mean they can sell some of their planes - if they no longer need as many, which could reduce their $5 billion of debt. Whatever happens, it will NOT be business as usual.
It's important to understand that VAH have NOT collapsed, like Ansett did. VAH will be recapitalised. They will continue to operate - in one form or another. They might get renamed, or rebranded. Their business model will get changed. However, the big question for people who own shares in them now is will they have new owners? If they get new owners, that's likely very bad news for existing shareholders, and there is always a possibility that they are recapitalised in such a way that secured creditors are looked after but that existing shareholders get very little to nothing. That could also result in them going private, meaning they never trade again - unless they are later re-floated (with new shareholders).
The best outcome for existing shareholders is probably either that the existing majority shareholders pour some more money in or/and VAH gain one or more new investors who are prepared to put in the billions required to make them commercially viable again. Both of those options result in significant dilution for existing retail shareholders, but both are preferable to some of the alternatives.
But - in terms of how long that all takes to play out, I would imagine months, not weeks, but I really can't help much more than that. We just don't know.
[Disclosure: I do NOT hold VAH shares]
Some excerpts from that last one:
Elephant in the Virgin Australia dataroom stumps hopefuls
Good luck to all the tyrekickers lining up at Virgin Australia.
No one party is in pole position to buy it and no one party has any firm idea about what it's worth.
Virgin Australia is the hardest company to value in corporate Australia.
The big elephant in Deloitte's data room is the company's ramp-up plans. What's the plan to get bums back on Virgin seats, what will it cost and when's it likely to be implemented?
No one can answer those three questions with any certainty – not now and not in eight weeks when Deloitte is likely to be calling for someone to put pen to paper on an acquisition.
The government-mandated travel restrictions mean Virgin barely has a business. It has a heap of contracted staff, planes, space in airports and the like, but next to no product to sell.
Sure, domestic travel is likely to come back first, but how quickly? And what about international travel?
It's a reason why Virgin spent the past few weeks lobbing proposal after proposal to the government. It's a terrible time to try to sell the airline.
Of course there are plenty of opportunistic tyrekickers lining up for a closer look.
BGH Capital, Oaktree Capital Management, Arizona's Indigo Partners are all genuinely interested. But it remains to be seen whether they will be able to both put a firm offer to Virgin and look their own investors in the eyes and tell them they've done the right thing. It's a fine line.
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